IKE TROTTER: Weighing in on reverse mortgages

More and more we see on TV or read in the paper about Reverse Mortgages and the opportunities available for homeowners to “unlock” the equity in their home. I thought it might be helpful to discuss this unique type of home equity loan and the resulting implications they offer to homeowners, particularly those who are retired and elderly. Created in the late 1980s, there were just 7,000 originated in the year 2000. By 2007, more than 100,000 reverse mortgages were originated, representing more than a 40 percent from the previous year! Fast forward to today and it continues to grow in interest by leaps and bounds. But reverse mortgages can also require careful review.

A reverse mortgage is a loan secured by home equity that makes payments to the homeowner -as opposed to requiring payments from the homeowner. As such, a reverse mortgage loan can be an important source of income for a cash-strapped homeowner. The requirements to a reverse mortgage are:

» The home must be the homeowner’s primary residence

» The homeowner must be age 62 or older

» The homeowner must either own the home outright or have a small enough existing mortgage that the reverse mortgage can pay off sufficiently.

» The home must be in good enough condition to pass a mandatory inspection.

If a homeowner qualifies for a reverse mortgage, he or she can receive money in the form of a lump sum, access to a line of credit, a monthly payment that can continue as long as the homeowner remains in the home or a combination of three. The homeowner retains the title and control of the home and there is no risk of foreclosure as long as the homeowner makes property tax and homeowner insurance payments. The loan does not become payable until the last homeowner dies, permanently moves out or sells the home. If, at the time of death of the homeowner, the value of the home exceeds the loan balance, the homeowner’s heirs can receive that additional value. With these facts being laid out, there are advantages and disadvantages to reverse mortgages that require careful consideration: As far as disadvantages; reverse mortgages have come under scrutiny for various real and perceived abuses. Many consumer protection organizations caution against entering into a reverse mortgage if there is not a clear understanding of the terms or if one does not properly consider alternatives. Another point is; reverse mortgages can potentially limit a homeowner’s choices later in life. That being, they will be spending money that could have been saved for other contingencies or otherwise could be available for heirs. Additionally, the costs and fees association with a reverse mortgage loan can be quite significant. Many consumer advocates point this out as being critically important.

On the other hand, a reverse mortgage can be a valuable financial tool for seniors whose major financial asset is their home. The classic situation of this is where a senior needs cash, has a lot of home equity available and strongly desires to remain in his or her home. Additionally, the money that a homeowner receives from the reverse mortgage is normally received tax-free and does not alter eligibility for Social Security retirement or Medicare health insurance benefits although eligibility for other government assistance programs can be affected.

Reverse mortgages can be financed in a number of ways but, in most situations, it is recommended by consumer advocates to seek financing through an insured FHA loan. It is also recommended to contact your local financial adviser, tax preparer for guidance as well as talk with an attorney who specializes in real estate law for further information.

With times being as they are, reverse mortgages are probably here to stay. Statistics show reverse mortgages with a market penetration of less than 5 percent of homeowners 62 and older. Certainly with celebrities like actor Robert Wagner, actor and former Senator Fred Thompson and even the “Fonz,” Henry Winkler, pitching them in television advertisements, they are sure to raise increased interest in the public eye. All in all, they can be of real help to those individuals and couples who have become asset rich and cash poor. However, I would make sure that I fully understand the facts before signing up. When all is said and done, there’s no better peace of mind than knowing that the home you live in is yours — free and clear.

Opinions presented are general information only and not intended as specific advice or recommendation for any individual situation or product. As individual situations vary, seek personalized advice from qualified professionals regarding all tax, legal and personal financial matters

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